Bill O'Brien has a permit to open an e-futures market, and he probably would have if the Chicago Mercantile Exchange's (CME) electronic cattle futures trading hadn't emerged a few years ago. But that hasn't stopped O'Brien, of Amarillo, TX, from developing an e-system enabling customers to sell and clear cattle on a cash basis — from their laptop if they wish.
O'Brien and his family are well known for their high-quality cow-calf, stocker and cattle-feeding operations. Their Texas Beef Producers company operates two feedyards in the northern Texas Panhandle. Bill has always been direct when it comes to marketing cattle. He was even part of the group that took on Oprah Winfrey in the late 1990s, claiming the media star caused beef prices to tumble when she bad-mouthed burgers.
In the mid '90s, about the time the Internet was on the verge of exploding, O'Brien sought electronic futures trading from CME. He even took steps to develop his own Futures.com futures market — and received a permit for it from the Commodity Futures Trading Commission (CFTC) in 2001.
CME added e-trading in 2002. O'Brien welcomed the new service and used it extensively. But, always the innovator, he worked to launch another e-product — Beefnet (www.beefnet.org). It's an electronic auction-type program enabling sellers to match their cattle with prospective buyers for a consignment fee of about $10/head.
“We feel this is a more efficient way of marketing cattle through a cash exchange,” O'Brien says. “Beefnet provides improved liquidity for sellers and buyers, ‘back-office’ automation, easy settlement and clearing and dispute-resolution capabilities. And cash sales can be linked to a futures trading exchange (CME Futurecom).”
About 25,000 cattle were traded on Beefnet in 2005 — 50 different sellers and 20 buyers. O'Brien expects the numbers to increase substantially this year as word spreads of the system's efficiency.
Specific sales are online. They're sometimes linked to an audiovisual system at the Amarillo Livestock Auction, where the Beefnet sale takes place immediately after the auction's regular Tuesday sale.
Registered Beefnet sellers list cattle on beefnet.org based on breed, sex, weight, origin, type of preconditioning and other pertinent info. An independent representative from Beefnet verifies the description and provides appropriate photos of the cattle for uploading to the site.
Registered buyers logging on to beefnet.org make bids by hitting a bid button with their mouse. A final price is awarded to the buyer with the highest and last bid. A countdown, viewed on the auction screen, allows all buyers to submit their last bids.
Once the lot is awarded to the highest bidder, an e-contract is sent to the buyer. The transaction is electronically settled through the Federal Reserve banking system through the Bank of Commerce, a small bank O'Brien purchased for electronic payments and collections.
Both the buyer and seller can use a laptop or desktop computer to watch funds move from the buyer to the seller electronically after delivery.
“Either party can have a representative at delivery,” O'Brien says, noting trades are monitored by the Beefnet representatives. “There are electronic transactions created according to NACHA rules accepted by the Federal Reserve Bank. Both the buyer and seller are protected. That's part of the cool protection we've built into the system. The seller can't be cheated, and buyers can't be cheated.”
To help guarantee proper transaction of funds, payment is cleared through an electronic banking system O'Brien established. “We meet our objective of having physical delivery of the cattle coincide with financial settlement on the clearing side,” he says.
Also, when the transaction is made on the cash exchange, if wanted, the trade can be linked to a sister futures exchange allowing hedged positions to unwind upon the completion of a transaction. “There's never been a cash exchange linked to a futures exchange before,” O'Brien says.
Charlie Sellers, a cattle buyer/seller in Amarillo and Hamlin, TX, reports good luck with the Beefnet program, for the most part. He bought some wheat pasture-grazed cattle located within 100 miles of Amarillo he might not have known about otherwise.
“I usually attend the Amarillo auction,” he says. “I bought those cattle after the normal sale ended. I was exposed to quite a few cattle I wouldn't normally have had a shot at.”
The e-trading was a bit confusing to his staff early on, but he worked with O'Brien to help streamline the usage.
“This was on a learning curve for electronic contracts and Bill and I worked out any problems we had,” Sellers says.
Mexican cattle also have been sold via Beefnet. Sellers says there were some early problems in his first encounter with this type of transaction. “There were some rough edges,” he acknowledges.
O'Brien says those edges are being smoothed and the Mexican sales will become more efficient as Beefnet evolves even more. Still, hang-ups with government inspectors can slow the delivery process.
In a sale of about 2,500 cattle from Mexico in March, cattle sold and destined for delivery on a Tuesday got stalled in Mexico because USDA inspectors shut off their numbers for the day.
“If the inspectors say, ‘that's all the cattle I'm doing today,’ then you just have to wait until the next day,” O'Brien says.
CME added electronic trading in 2002. It, however, represents only 2-3% of the overall live cattle daily trading volume, which surpassed a record 38,000 the first quarter of 2006, up about 13,000 from the 25,000+ in the same period in 2005, says Thomas Clark, CME manager of commodity products sales.
One of O'Brien's complaints is electronic feeder and live cattle futures trading aren't keeping up with e-grain trades.
“More than 90% of CME cattle trades are still through the open outcry,” he says. “It's much higher for grain (on the Chicago Board of Trade).
Troy Vetterkind, commodity broker with E-Hedger, LLC in Chicago, uses CME's Globex e-trading platform for occasional e-trades on live and feeder cattle.
“I usually go directly to the trading pit, but do some trades electronically,” Vetterkind says. He says one big use of Globex is by speculators and others who want to make trades directly.
“The open interest (for open outcry) is a lot higher than even a year ago,” he says. “Globex is a good platform for those who don't want to do business in the pit.”
He expects e-trading to expand as the trading tools are refined. So does Clark, who's seeing an explosion of virtually all commodities trading at CME.
Open interest in its live cattle contract months surpassed 246,300 in late April, up nearly 40% from 142,300 the same period in 2005, he says. With the huge market activity, Clark believes Globex can enhance the ability of producers, feeders and other hedgers to make quick futures and options trades.
“Commodities have seen a tremendous boom the last 2-3 years,” he says. “Our hedging interest (for which the live-cattle contracts were established more than 40 years ago) continues to grow at the same time as the growth in speculators using the contracts. Globex is just another venue to facilitate those trades.”
Clark points out Globex users must still have a brokerage account, adding there are two ways to make e-trades. Through an ISV connection to the Globex platform, a hedger can go directly to Globex and make trades without going through the broker.
“Your brokerage firm will likely monitor the trades to help assure proper transactions are made,” Clark says. “You can also call the broker and say you want to buy or sell futures or options contracts on Globex. The broker can do it for you. With a click, the trades are made instantly. You don't have to wait (for a call to the trading floor, then a call back to you).”
Larry Stalcup is a freelance writer based in Amarillo, TX.